Confessions of a Capital Junkie

An insider perspective on the cure for the industry's
value-destroying addiction to capital

April 29, 2015

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about future events and, by their nature, are subject to
inherent risks and uncertainties. They relate to events and
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in the future and, as such, undue reliance should not be
placed on them. Actual results may differ materially from
those expressed in such statements as a result of a variety
of factors, including: the future capital expenditures and
research and development expenses of the Group and the
industry, potential benefits from industry consolidation;
developments in global financial markets and general
economic and other conditions; changes in demand for
automotive products, which is highly cyclical; the high level of
competition in the automotive industry; the Group’s ability to
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improve the Group’s business, financial condition and results
of operations; operating expenditures including in relation

Confessions of a Capital Junkie

to vehicle and powertrain development and compliance
with regulations; exchange rate fluctuations, interest rate
changes, credit risk and other market risks; our ability to
achieve the benefits expected from any capital optimzation
plans; and other risks and uncertainties.
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Company’s financial results, is included in the Company’s
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April 29, 2015


2015 3 .Purpose of the pitch  Goal is to provide clarity on two issues that have been raised publicly by FCA ● Industry has not earned its cost of capital over a cycle ● Consolidation is the key to remedying the problem  What this is not about ● An excuse for FCA’s current ranking in the automotive food chain ● Putting FCA up for sale ● A revision to our 5 year plan (which remains a firm commitment) ● A matter of life or death for FCA ● SM’s final big deal  What this is about ● Dispassionate look at the industry from the outside using insider knowledge ● It is about choosing between mediocrity or fundamentally changing the paradigm for the industry Confessions of a Capital Junkie April 29.

but not to his own facts.Before we get into this.” Daniel Patrick Moynihan (Former US Senator and Ambassador to the UN) Confessions of a Capital Junkie April 29. we should be reminded that … “Everyone is entitled to his own opinion. 2015 4 .

Kia. Ford. Premium OEMs: BMW. Toyota. 2015 5 . Renault. General Motors. Nissan. Honda.Auto industry’s capex and R&D requirements have grown significantly over the past years … Mainstream OEMs Premium OEMs Top OEMs1—Total capex + R&D spending over last 5 years (€bn)2 CAGR: Mainstream OEMs: ~12% Premium OEMs: ~10% 122 117 107 91 76 18 19 17 14 12 91 99 104 78 64 2010 2011 2012 2013 2014 Source: Company annual reports 1 Includes mainstream OEMs: FCA. Daimler Cars 2 Translated at constant 2010 exchange rates (average January to December 2010) Confessions of a Capital Junkie April 29. Volkswagen. PSA. Hyundai.

and going forward.. new technological challenges will continue to raise the bar on capital requirements Forces at work increasing capital requirements—Selected examples Regulatory-driven Emissions regulations  Tighter emissions regulations  Costly new powertrains  Weight-saving technologies Customer-driven Safety regulations  Stricter regulations and customer focus on safety  Adoption of state-of-theart safety technologies across markets Car connectivity and autonomy  New infotainment services  Customer expectations on connected cars  Autonomous drive push Auto OEMs Confessions of a Capital Junkie April 29... 2015 6 .

Product development costs are consuming value at a much faster rate than in other industries … Time to reinvest enterprise value1 in product development (capital and R&D)2 Average number of years ~ 36 ~ 28 ~ 23 ~ 18 ~ 19 Average across industries3: ~ 20 ~20 years ~ 13 7.1 3.6 3.5 Consumer & Retail Building materials Packaging materials Chemicals Aerospace & Defence Pharma Telecommunication Oil & Gas OEM 4 OEM 6 OEM 8 OEM 2 OEM 7 Premium OEM OEM 5 OEM 10 OEM 9 OEM 1 ~4.4 Auto industry average: ~7 5. Including pension liabilities Calculated as 3-year average of the annual ratio between enterprise value (for the period 2012–2014) and capital expenditures plus R&D expenses Based on the reference sample Confessions of a Capital Junkie April 29. 2015 7 .6 3.0 Source: Company annual reports 1 2 3 Industrial activities only.8 8.2 3.1 years FCA OEM 3 1.0 2.4 3.3 3.8 4.

Nissan. Toyota.. Renault.. and high operational leverage amplifies profitability swings across the cycle . Volkswagen Confessions of a Capital Junkie April 29. 2015 8 . Ford. Kia.. General Motors. Hyundai. PSA. Honda. EBIT as per accounting principles adopted by each company Mainstream OEMs include: FCA... EBIT Margin1 of Auto OEMs vs other sectors (%) 30% 19% 8% (3%) 2005 2006 2007 2008 2009 2010 2011 2012 Aerospace & Defence Building materials Chemicals Consumer products Pharmaceuticals Telecommunications Premium OEM Mainstream OEMs 2013 2014 Packaging 2 Source: Company annual reports 1 2 EBIT defined as Industrial reported EBIT plus income from equity accounted investments and excludes goodwill impairment.

2015 9 . Hyundai. Honda. Goodwill) + Book Value of equity accounted investments + operating cash for OEMs (assumed at 12. General Motors. Assumed a normalized tax rate equal to 30%. Kia. EBIT as per accounting principles adopted by each company Mainstream OEMs include: FCA. EBIT excludes goodwill impairment. Ford. Toyota. Volkswagen Confessions of a Capital Junkie April 29.… resulting in structurally low and volatile returns ROIC1 of Auto OEMs vs other sectors (%) 30% 20% 10% Consensus WACC: ~9% 0 (10%) 2005 1 2 2006 2007 2008 2009 2010 2011 2012 Aerospace & defence Building materials Chemicals Consumer Pharma Telecommunications Premium OEM Mainstream OEMs 2013 2014 Packaging materials 2 ROIC calculated as [Industrial reported EBIT x (1-taxes) + income from equity accounted investments] / Industrial Net Invested capital.5% of industrial sales). Nissan. Industrial Net Invested capital is defined as industrial Trade Working Capital + Industrial PP&E + Industrial Intangibles (excl. PSA. Renault.

potentially overlapping with competitors Chart scale based on mid-point of range shown Confessions of a Capital Junkie April 29. many not really discernible to customers Typical vehicle development costs Powetrain Tooling ~5% New vehicle program—development costs split1 Other ~5% Vehicle R&D ~40% Powetrain/ R&D ~15% 45–50% 50–55% Vehicle Tooling ~35% Differentiating products/ technologies 1 Products/technologies “undiscernible to customer”.Why did this happen? OEMs spend vast amounts of capital to develop proprietary components. 2015 10 .

Suzuki. Ford. and more of our vehicles will be on global architectures" Dan Akerson.One industry solution focuses on reducing the number of active platforms and increasing scale … Active platforms by OEM1 Number of top hats by platform2 Average across top 10 global OEMs Average across top 10 global OEMs 22 3.6 2004 2009 +30% 2014 "More of our components will be common. 2015 11 .3 21 18 2004 2009 -20% 2014 2. and our team is working towards a further consolidation of that to get down to a long-term target now of eight global platforms […] that obviously yields tremendous benefits for us as an enterprise” Raj Nair. In 2016 we'll reduce that down to a further nine global platforms. Ford Group Vice President-Global Product Development (2015) SOURCE: IHS 1 2 Adjusted to include only platforms with at least 2.5 2. Hyundai. GM (2011) "I'm really proud to say that we've reduced that number down to 12 global platforms. Renault/Nissan. Toyota.000 cars manufactured in a given year Including FCA. Honda. Volkswagen Confessions of a Capital Junkie April 29. PSA. GM.

… and some OEMs are trying larger scale commonization across diverse brands … Golf Spacefox (2018) Fox (2017) Lamando MQB MC-M ARCHITECTURE ARCHITECTURE Voyage (2018) Scirocco (2018) Polo (2016) Passat Golf SportVan CC (2017) Touran Jetta (2016) Tiguan (2016) B-CUV (2016) Crossblue Crossblue coupe (2018) Golf SportWagen Lavida (2018) Sagitar (2017) A1 (2018) TT Octavia Ibiza (2016) Alphard Harrier RAV4 Avalon Highlander SAI Avensis Mirai Sienna Q1 (2016) Q3 (2018) Yeti (2017) Leon A3 C-MPV (2017) Superb B-CUV (2018) Camry Prius C-CUV (2016) C-CUV (2016) Estima Prius Alpha (Prius V) Wish ES Mebius HS NX Venza RX Voxy “By the middle of 2020. which will change with a company-wide effort. 2015 12 . Toyota Executive VP (2015) Source: IHS—Global 2018 Sales database as of April 2015. Toyota global newsroom Confessions of a Capital Junkie April 29. we plan to expand TNGA (Toyota New Generation Architecture) to approximately half of the line-up […] —Traditionally we have tended to focus on developing individual models and lacked the total alignment and consistency.” Mitsuhisa Kato.

… while others through one-off co-operations. JVs and other equity tie-ups Successful Long-term industrial co-operations (JVs) Cross-shareholdings— enabled co-operations Full integration Low/negative Expected impact at the time of the deal High One-off industrial co-operations Failed Low High Level of integration Confessions of a Capital Junkie April 29. 2015 13 .

General Motors.8x 12% 6. Honda. Toyota.8% 1 2 9. as OEMs' returns and valuations are still depressed 2014 EV/EBITDA2 2014 ROIC 13. Nissan.7x 11. PSA. Volkswagen Based on 2014 average enterprise value for the companies in the reference sample.1x 10. 2015 14 .1x 14% 7. EBITDA as per accounting principles adopted by each company Confessions of a Capital Junkie April 29. Ford.0x 22% 11. EV including pension liabilities.But all this has produced poor results so far.0x 13% 10% 11% 6.0x Packaging materials 16% Aerospace and Defence 19% Mainstream OEMs include: FCA. Hyundai.0x Oil & Gas Mainstream OEMs 1 9.2x Pharma Consumer & Retail Building materials Chemicals Telecommunications Oil & Gas Mainstream OEMs Consumer & Retail Pharma Aerospace and Defence Packaging materials Chemicals Building materials Telecommunications 1 4. Kia. Renault.

BUT significantly slower execution. less costly architectures ● Option available only to those OEMs with existing scale across platforms. entailing lower returns over an extended period  OEM co-operations ● Most effective on single ventures. top hats and regions ● Requires strict discipline to avoid upward standardization/over engineering ● Lower risk in the short-term. 2015 15 . but with limited scope ● Usually involve non-core elements of portfolio ● Not a pervasive.Why haven’t these approaches provided a significant lift to returns?  Large scale organic reduction in platforms ● Reluctance to replace old. substantive solution for any OEM Confessions of a Capital Junkie April 29.

enabling rapid scale gain ● Fostering step-change/best-of-best approach to modularity/ commonality AND  The potential savings are too large to ignore Confessions of a Capital Junkie April 29.Why does industry consolidation matter?  High mortality rate caused by partial if non-existent integration ● Cultural divide (corporate and otherwise) ● Inequality of integrating parties ● Operating models radically different and never merged ● Insufficient sensitivity for brand differences ● Lack of respect/trust for one another  Complexity proved to be too much of a stretch for leadership teams BUT  It enables ● Fast execution. 2015 16 .

2015 17 .Steering HVAC sions/ wheels Electri.Interiors cal/ Electronics/ Connectivity Common Total general Assy/ Paint Frame/chassis Potential commonality while ~70% preserving differentiation ~10% ~75% ~90% ~80% ~80% ~80% ~70% ~30% 100% Potential commonality up to ~45-50% of total development cost2 Potential benefits up to €2 billion on vehicle investments 1 2 Includes mounts.Brakes train installation systems1 Suspen. fuel system. cooling and other minor components/systems Average weighted on contribution to product development cost Confessions of a Capital Junkie April 29.The facts: Breaking down product development costs E-MPV segment mainstream “all new” vehicle example OEM B OEM A Typical development cost for vehicle and platform (excluding powertrain) % of total development costs 100% 14% 17% 7% 1% 4% 1% 2% 5% 38% 11% Underbody Upperbody exterior Power.

Powertrain portfolios show even higher duplications across OEMs.3-1. low volumes Confessions of a Capital Junkie April 29.6L) • Medium (2.0L) Gas • 3 Cylinder • 4 Cylinder • V6 Hybrid • V8 • Mild (BSG) • Full Minor overlap Exotic engines1 Potential overlap with FCA engine budget 1 >90% ~90% ~50% >60% ~90% High performance engines. limited productions.0-6. 2015 18 . both for engines … Overlap with future FCA engine offering Major global car OEMs benchmarked Engine lineup OEM 1 OEM 2 OEM 3 OEM 4 OEM 5 OEM 6 OEM 7 OEM 9 >70% >50% >90% Diesel • Small (1.3L) • Large (3.0-2.

… and for transmissions Overlap with future FCA transmissions offering Major global car OEMs benchmarked Transmissions lineup OEM 1 OEM 2 OEM 3 OEM 4 OEM 5 OEM 6 OEM 7 OEM 9 ~90% ~90% ~50% ~ 80% ~60% ~ 70% ~ 50% >90% • Manual 5 Speed • Manual 6 Speed FWD • MTA • DDCT • Automatic 6 Speed • Automatic 8/9 Speed • CVT • Manual 6 Speed RWD • Auto. 2015 19 . ≤7 Speeds • Auto. ≤7 Speeds (1000 Nm) • Auto. HD. ≥8 Speeds • Auto. HD. ≥8 Speeds (1000 Nm) Potential overlap with FCA transmissions budget Potential elimination up to €1 billion in duplicated engines and transmissions spending per year Confessions of a Capital Junkie April 29. LD. LD.

Example for mainstream B/C segment estimated with same methodology as of case for E-MPV segment (45-50%) Assuming a powertrain average lifecycle of 10 years. vehicle installation Total consolidated investment Estimate based on 40-80% saving on the second vehicle leveraging commonalities in product development. example for two 4-cylinder gasoline engines to be based on the same architecture ~50 ~100 ~25-30 ~70-75 ~50 Engine A 1 2 Engine B Total stand-alone investments for A and B Savings on base development. example mainstream B/C segment built on same platform ~50 ~100 ~20-401 ~60-80 ~50 Vehicle and platform A Vehicle and platform B Total stand-alone investments for A and B Savings on total investment Total consolidated investment Illustrative investment for developing 2 new engines2 Indexed to 100. vehicle and powertrain development can yield significant savings Illustrative investment for developing 2 full new vehicles Indexed to 100. Tooling synergies not considered Confessions of a Capital Junkie April 29.The facts: Sharing platform. 2015 20 .

We believe large scale integrations are required to unleash full potential Potential for capital rationalization across different types of co-operation Low High Drivers for capital rationalization Key enabler: Integrated industrial footprint strategy One-off technical cooperation JVs Cross-shareholding enabled co-operations Full integration Share R&D costs and tech development Optimize tooling investments Key enabler: Integrated product strategy Maximize plant utilization Capture crossselling opportunities Capture other opex opportunities Potential for capital rationalization Confessions of a Capital Junkie April 29. 2015 21 .

2015 22 .5bn per year 1 FCA analysis of potential consolidation opportunities among top 10 global automotive OEMs Confessions of a Capital Junkie April 29.5-4. purchasing. sharing component development costs) ~70%  Avoiding budget duplication for powertrains  Optimization of Cross-selling ~15% Other opex opportunities manufacturing investments and production allocation (e.g.g.Potential synergies from consolidation of auto OEMs would be ~70% driven by industrial rationale Estimated benefits from consolidation of auto OEMs1  Sharing platforms development costs Technology and product development  Leveraging commonalities in top-hat development (e. SG&A) ~15% Combinations of FCA with another large OEM would yield benefits of €2.

0x 4.0x 2.0x EV/EBITDA1 2014 1 Including pension liabilities.0x 8.0x 6.Consolidation can support significant ROIC and valuation improvement ROIC FY 2014 25% Consumer & Retail 20% Pharma Consensus 2018 adjusted for consolidation Premium OEM 15% Aerospace and Defence OEM 6 OEM 8 Packaging materials OEM 7 OEM 4 10% Telecommunications Oil & Gas OEM 5 Chemicals Building materials Consensus 2018 Auto industry WACC: ~9% Automotive today 5% Status quo OEM 9 OEM 10 OEM 2 OEM 1 OEM 3 0% 0.0x 12. 2015 23 .0x 14.0x 10. EBITDA as per accounting principles adopted by each company Confessions of a Capital Junkie April 29.

Some conclusions  Top OEMs spent over €100bn for product development in 2014 only. even after the restructuring of the US auto industry and NAFTA volumes at peak  Single purpose projects.5bn per annum. >€2bn/week in product development and tooling costs. 2015 24 . does not deliver real value to consumers and is pure economic waste  Consolidation carries executional risks BUT benefits are too large to ignore ● Up to €4. with no impact on number employed ● Distribution (dealer networks not merged) and brands untouched by consolidation ● An exceptional value creation opportunity for shareholders  It is ultimately a matter of leadership style and capability… Confessions of a Capital Junkie April 29. ~70% of which is a reduction in investments and R&D ● Optimized industrial allocations. but they are not enough  Capital consumption rate by OEMs is unacceptable—it is duplicative. and poised to invest at similar rates in the futures  Historical returns have been broadly below cost of capital. JVs and the like are helpful.

“Now here you see it takes all the running you can do to keep in the same place.The Red Queen “Well. If you want to get somewhere else. 2015 25 . in our country” said Alice.if you ran very fast for a long time as we’ve been doing. “you’d generally get to somewhere else .” “A slow sort of country!” said the Queen. you must run at least twice as fast as that!” L. Carroll Through the Looking Glass Confessions of a Capital Junkie April 29. still panting a little.